Fund Your Child’s Education through Mutual Fund SIPs

Here is how to go about funding your child’s education through SIPs:

Start investing early: When parents start investing early through SIPs they allow more time for their money to grow. Also, the monthly outgo in the form of SIPs is lower than for those investing late for the same amount of corpus. For instance, if one wishes to accumulate a corpus of Rs 50 lakh when your child reaches 18 years of age, with the assumed rate of return being 12%. If one starts investing when the child is eight years old, one would have just 10 years to build this corpus with a monthly SIP of Rs 21,000. However, if the investment starts when your child is three-year old, you would have an investment horizon of 15 years which will lead to a monthly SIP of just Rs 10,000.

Calculate the corpus required: Parents need to calculate the corpus amount before investing, based on current possible career options. However, make sure that while calculating this amount, existing as well as the expected inflation rate is taken into account. Do not commit the mistake of calculating the education corpus based on just present education costs as this is likely to lead to an insufficient corpus. Calculating the corpus helps in analyzing the monthly payout through SIPs till the time your child reaches 18 years of age. Make use of SIP calculators available online to know how much amount one would need to pay monthly to accumulate the required amount of corpus.

Go for zero commission direct plans: Direct plans enable investors to buy mutual funds directly from fund houses without the involvement of financial intermediaries and without incurring expenses associated with them. Their lower expense ratio, higher net asset values (NAVs) and greater returns make it a better option than regular plans. Even first time investors looking to start SIPs to fund their child’s education can choose to purchase direct plans through online marketplaces that can guide you and provide free advisory services.

Build portfolio according to risk appetite: Parents need to select the right funds for their investments. Every investor has a different risk appetite which anchors their decision while building their portfolio. Ideally, one's core portfolio should include a few top multicap funds as these funds can invest in shares of large, mid and small sized companies, and are thus able to align themselves as per changes in market conditions. Including a couple of midcap funds can boost the growth rate of your education corpus. However, if the risk appetite for equities is low, consider sticking to largecap funds. Select funds that have consistently beaten their benchmark indices and peer funds over the last 3-5 years.

Increase the SIP amount whenever possible: After deciding on the SIP amount, make sure to review it periodically and increase it whenever one has additional funds to do so, by using the step-up facility. Ideally, you should increase the SIP amount every year as one's income goes up. This contributes in the long run as one would be able to accumulate a larger corpus since the SIP amount keep increasing by a definite percentage every year, or whenever one has funds to increase it. Many fund houses are offering the option of half yearly or yearly top-ups to investors at the time of filing their SIP enrolment forms.

Track the funds’ performance periodically: Make sure to keep track of the chosen funds’ periodic performance. Exit funds which have been underperforming consistently for about 2-3 years, have changed their management style or fund managers. Regularly compare one's existing fund’s performance with the benchmark and other funds in its category to evaluate performance. If it is performing satisfactorily, hold on to it, otherwise one must consider switching to some other better performing fund to prevent any damage to your corpus creation process. Merely investing in mutual funds and not tracking them may lead to failure in accumulation of the desired corpus due to various reasons.